Today we hear from Lars in Hawaii who tells us, “I am preparing a 2006 California – CA (540NR) tax return for a client who moved to Hawaii in June 06. This client has two W-2’s. The first six months he lived in CA; the second six months in Hawaii. It would seem that this should be pretty straight forward, with the California W-2 taxed in CA, and the Hawaii W-2 taxed in Hawaii. The California return starts with the Federal adjusted gross income, but I cannot find any place to exempt or exclude the Hawaii income. It seems that CA wants to tax the Hawaii income as well. Am I missing a schedule or what?”
Hey Lars,
Trying to prepare other states’ tax returns when you don’t live there, or file tax returns in the other state regularly is usually an exercise in frustration.
Naturally, California does try to tax all worldwide income, wherever possible. However, you’re right. You are, indeed, missing a schedule.
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Possibly two.
You’re using the California Form 540-NR, which applies to non-residents and part-year residents.
https://www.ftb.ca.gov/forms/04_forms/04_nr_long.pdf
Clearly, you haven’t seen the Schedule CA (540-NR), which apportions the income to each state. That’s where you split the income before sending the numbers to the Form 540-NR. There’s an adjustment to deduct the Hawaii income.
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https://www.ftb.ca.gov/forms/04_forms/04_nrca.pdf
Then, you may also be missing a Schedule S – that’s the Other State Tax Credit form.
https://www.ftb.ca.gov/forms/06_forms/06_540s.pdf
That’s where you may apply the tax credit for taxes paid to Hawaii, if that income is also taxed in California. (See the instructions on page 1 of the form.
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) You may not need it, if the Schedule CA-NR works properly.
Since he was a part-year resident, he should be entitled to deduct the Hawaii taxes. Non-residents are only allowed to deduct Arizona, Guam, Indiana, Oregon, and Virginia. Odd.
I hope this helps?
And remember, you can find answers to all kinds of questions about California tax laws and all kinds of other tax issues, free.
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Where? Where else? At TaxMama.com
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- Ask TaxMama :: Where taxes are fun and answers are free
- TaxQuips :: The number ONE tax podcast online
- Califronia FTB Form 540-NR :: For non-residents and part-year residents
- Califronia FTB Form CA (540NR) :: Adjustments
- Califronia FTB Schedule S :: Other State Tax Credits
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